Attendees at the Frankfurt Auto Show check out the Fisker Karma in October 2011.

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If you ask Henrik Fisker, the founder and executive chairman of Fisker Automotive, what his company does, he'll tell you he's shaking up the car industry with a beautiful, new, technologically advanced, environmentally friendly automobile.

But if you asked Republican presidential candidate Mitt Romney, he'd tell you--as he said to a Pennsylvania audience this summer--that the Anaheim, California-based electric-car maker is an example of extreme government waste, crony capitalism, and misguided government support for undeserving industries.

Speaking at a rowdy campaign rally in Irwin, Pennsylvania, in July, Romney told the crowd:

I am ashamed to say that we’re seeing our president hand out money to the businesses of campaign contributors, when he gave money, $500 million in loans, to a company called Fisker that makes high-end electric cars--and they make the cars now in Finland. That is wrong and it’s got to stop. That kind of crony capitalism does not create jobs and it does not create jobs here.

The truth is considerably more complicated and offers a cautionary tale for small-business owners: Government funding can be incredibly useful, particularly for high-tech or clean-technology innovators, who have more opportunities to get federal support--but it comes with plenty of baggage attached.

And there's another lesson as well: As a small-business owner, the way you react once you've been thrust on the world's stage matters--particularly if there is deep, hurtful criticism that can damage your brand and your future business prospects.

"This is political, and politics does not always make sense," Fisker says.

A $529 Million Loan

Fisker's story has drawn parallels with Solyndra, the solar panel company in Fremont, California, that shut down in bankruptcy and controversy after receiving half a billion dollars in loans from the federal government. Like Solyndra, Fisker sought, and received, substantial government support.

Unlike Solyndra, however, it got financing under a program created before Barack Obama became president. The funds came from a Department of Energy program meant to develop advanced technology for cars, created through bipartisan support in 2007 under George W. Bush; Fisker applied for the loan in 2008. (Other recent loan recipients under the program include rival electric-car maker Tesla Motors, as well as Ford Motor and Nissan North America.)

Fisker was approved for a $529 million loan in 2009. The deal was structured to give the company access to funds in two tranches, tied to the successful completion of specific business milestones. The first chunk of financing, a loan for $169 million, supported the development of the Fisker Karma, an electric luxury sedan with a hefty $100,000 price tag. The remaining money was to be used to build out a plant in Delaware, acquired from General Motors during its bankruptcy reorganization in 2009, to manufacture a more affordable sedan called the Atlantic, with a price tag of about $50,000.

Problems Emerge

But in May 2011, the DOE froze the second part of Fisker's loan after the car company failed to meet sales goals laid out in the loan agreement, because of a combination of production and regulatory issues. Fisker, which says it has sold about 1,500 vehicles worldwide, has also been beset by some major product problems. In at least one instance, a Karma burst into flames due to a faulty cooling fan, and when Consumer Reports tried to take the Karma for a test drive, it failed to operate due to a battery problem.

Then Romney attacked, accusing Fisker of two more transgressions: spending taxpayer funds to pay workers at a plant in Finland that Fisker uses for advanced motor assembly, and milking political connections to get the financing. (John Doerr, a partner at venture capital firm Kleiner Perkins Caufield & Byers, which has invested millions in Fisker, is an economic advisor to the Obama administration as well as a Democratic fundraiser.)

Failing to meet production and sales deadlines is fairly common for new technology products, says Timothy Lipman, co-director of the Transportation Sustainability Research Center and a car industry analyst. He points out that car manufacturers must deal with the expense of producing their product, creating large distribution channels, satisfying regulatory concerns, and testing, among a host of other issues.

"Cars have a very high barrier to entry, and car manufacturers must cross a 'Valley of Death' to bring a product to market," Lipman says.

Both of Romney's claims, however, could be extremely problematic if proved true--with Fisker potentially violating the terms of the loan, on the one hand, and falling afoul of federal conflict-of-interest rules, on the other. "When you are pouring millions of dollars to support a company that is not manufacturing a large amount of their product in the U.S., it stands to reason other companies might be doing more to benefit the economy with that money," Lachlan Markay, an investigative reporter for the Heritage Foundation who examines government spending on green technology, says about Fisker.

Worrisome Precedent

To critics, the brouhaha recalls a GOP scandal that dates back 30 years: that of defense contractor Wedtech, a former South Bronx, New York, baby carriage manufacturer that used fraudulent minority-contractor status to become a $100 million-a-year defense contractor.

The company was founded as a machine shop by Puerto Rican immigrants, but by the time of its expansion it had sold a controlling interest to Romanian-born businessman Fred Neuberger. With forged documents claiming it was still minority-owned, Wedtech bought or bribed officials in three states, as well as in the Capitol and White House, where former Reagan advisor Lyn Nofziger used his influence on behalf of the company. Wedtech ultimately garnered some $500 million in Pentagon small-business contracts to build things like military engines, grenade throwers, and pontoon boats.

The scandal finally implicated more than 20 people--including Attorney General Edwin Meese III, who had allegedly intervened on behalf of the company to successfully secure a $32 million army contract that had originally been rejected. Meese resigned because of the taint, although he was never charged with wrongdoing.

Fighting a PR Nightmare

As for Fisker: Both the automaker and the Department of Energy say the Romney claims are patently false. Fisker says no funds from the DOE grant were ever used overseas. And Damien LaVera, a spokesman for the DOE, wrote in an email, "Nothing in any of the 950,000 pages of documents the Department has voluntarily provided to Congress demonstrates anything except what we have consistently said from day one: decisions on loan applications were made on the merits after careful review by career officials and technical experts in the loan program.”

The Romney campaign did not respond to a request for comment, and Kleiner Perkins declined to comment.

But even if Romney's attacks were invalid, they created a PR nightmare for Fisker--and the company knew it had to respond immediately. Lacking a big budget to run commercials and advertisements, it decided to reach out personally to people who mattered most to the company.

"Our reaction was to come out with a factual and very unemotional list of facts that challenged the allegations and put the facts in place," says Roger Ormisher, a company spokesman.

That list was sent to media and investors as well as any customers who had questions. And that seems to have done the trick. "This is all noise that will be gone after November, and the people who know about it don't care anymore," says one investor, who asked to remain anonymous.

Future in Question

That's not to say Fisker doesn't have other obstacles to overcome. It recently laid off about two dozen workers in the Delaware plant, where it had planned to add 2,500 employees. The remainder of the DOE financing is also in question, although the automaker says it plans to rely more on private funding to support its operations.

Henrik Fisker says the company has raised more than $1 billion in private equity investment since 2007, with the DOE loan actually helping the company attract hundreds of millions of dollars in 2009 and 2010 by giving it a "runway."

And going forward, the entrepreneur says, he hopes to stay out of politics and let Fisker Automotive return to its core mission.

"Our plan is to continue to make great cars and engineer them here in the U.S.," Fisker says.

This story was updated on October 1, 2012 to correct the total number of Fisker Karmas sold and the cause of the vehicle fire.